Global M&A Trends in Industrial Manufacturing and Automotive Sectors: 2022 Mid-Year Update

Dealmakers focus on technology, workforce, supply chain and ESG as they navigate current market uncertainties and plan a return to long-term value creation.

Global M&A activity has slowed in 2022 as companies across the industrial manufacturing and automotive (IM&A) sectors are facing growing uncertainty. Headwinds that we noted in our 2022 Outlook—supply chain disruption, commodity price increases, skilled labour shortages and the global semiconductor shortage—have all intensified and may create both challenges and opportunities for dealmakers in the second half of the year.

Lockdowns related to COVID-19 in a number of Chinese cities have reduced manufacturing output and disrupted exports from the Asia Pacific region. At the same time, the Russia–Ukraine conflict is exacerbating already stressed supply chains, and corporates’ actions to exit from Russian operations or deal with sanctions are inevitably diverting management focus from other strategic priorities, including M&A. We expect this to continue, at least in the short term.

Volatile and high energy and commodity prices continue to disrupt industrial manufacturing and automotive sectors, both of which are large consumers of energy and raw materials. Other sectors, such as business services and aerospace and defence, appear to be less impacted by the current headwinds. As a result, we expect the latter to remain attractive sectors for M&A activity.

Business leaders across all IM&A sectors who see technology as central to gaining a competitive advantage will continue to engage in M&A. IM&A companies have long been buyers of technology assets, and we are now seeing more examples of greater convergence across sectors. For example, the automotive and energy sectors are working closely together to develop technologies focused on e-mobility, including electric, hydrogen-powered and autonomous vehicles, batteries, and charging stations. As business leaders continue to look to technology to transform their business models, we expect further tech-related deals in the areas of automation, digitalisation, next-generation materials and production powered by renewable energy sources.

With wage inflation, skills shortages and an increased stakeholder focus on environmental, social and governance (ESG) issues such as diversity, inclusion and well-being, IM&A companies are placing a greater focus on their people. Consequently, dealmakers are making workforce matters a priority area of focus during due diligence, as the success of any deal is highly dependent on having access to the right talent.

Another key M&A trend in the second half of 2022 will be portfolio optimisation, as corporations review their business activities and consider divesting non-core assets to focus investments on growth areas of their business portfolio. Moreover, we expect the current market uncertainties to drive distressed M&A, especially in automotive-component and energy-intensive industrial niches in which value preservation will be a constant focus in the second half of the year.

Global M&A industry trends in industrial manufacturing and automotive

Aerospace and defence

  • As global air travel is expected to rebound to pre-COVID levels faster than previously anticipated, commercial aerospace players are more optimistic about future orders. However, lockdowns in many Chinese cities in the first half of 2022 serve as a prescient warning to business leaders that the recovery may be uneven. Fluctuating demand in some geographies and a lack of availability of components continue to create uncertainty around production capabilities. We expect aerospace companies will turn to M&A to secure key suppliers and build further resiliency into their supply chains in the coming months.
  • For defence players, the impact of the Russia–Ukraine conflict has led many governments, especially in Europe, to invest in the strategic independence of their defence systems. Although defence budgets have increased almost everywhere, the long-term nature of defence contracts means it takes time for this funding to flow from governments to contractors. Therefore, we do not anticipate a near-term uptick in M&A. Growing geopolitical tensions, particularly in the Asia Pacific region will likely lead to a stronger shipbuilding industry, although the implications for M&A are less clear.
  • In the medium term, increased orders will likely create opportunities for M&A, as companies seek to build capacity or to address issues in their supply chains. Driven by the high cost of development programmes, such as the fifth- and sixth-generation fighter jets, we expect to see further collaboration between countries, particularly in Europe, possibly in the form of partnerships and joint ventures.
  • Increased regulation in the US, UK, EU and several other countries—often based on national security concerns—will likely deter larger and cross-border deals. Instead, dealmakers may shift their strategy to undertake a number of smaller acquisitions, which will likely draw less scrutiny from regulators. With the focus squarely on acquiring technology capabilities—particularly hypersonic, cyber, AI and unmanned—we expect valuation multiples for these assets to remain high.
  • The commercialisation of the space sector offers attractive growth opportunities, but we expect early-stage companies may struggle to find investors willing to continue to fund riskier bets in the current environment. In the first half of 2022, the space sector saw just one deal announced over US$1bn. With the special purpose acquisition company (SPAC) exit route now closed for many start-ups, we may see some distressed M&A by specialised private equity (PE) firms.

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  • Supply chain disruption and a shortage of skilled labour continue to hamper the ability of original equipment manufacturers (OEMs) to meet the demand for new vehicles, and 2022 has brought new challenges. The Russia–Ukraine conflict has exacerbated production and supply chain difficulties, mainly for European automotive companies. Inflation, high energy prices and the rising cost of raw materials such as nickel and steel are increasing production budgets and creating downward pressure on margins for suppliers.
  • Given the current macroeconomic and geopolitical environment, it is unsurprising that M&A volumes and values declined in the first half of 2022. However, we see strong demand among OEMs to acquire technology as the shift continues to e-mobility and away from the production of internal combustion engines (ICE). Specific deals to address supply chain issues and skilled labour shortages or to gain access to key raw materials, such as critical minerals for batteries for electric vehicles (EVs), are likely. We expect OEMs to optimise their portfolios, divesting non-core assets and investing—often via their own venture funds—in promising new technologies.
  • For suppliers in the challenged powertrain sector, the M&A focus will likely be on consolidation. There is a number of distressed assets, particularly in Germany and Italy, for which it is challenging to obtain further funding or to find a buyer. Concerned about high levels of exposure to the automotive sector, lenders are likely to exercise much more caution, which could impact the ability of those companies to refinance debt in the next six months. As a result, we expect that more distressed M&A and restructuring activity may occur in the second half of the year, when some companies will need to renegotiate the COVID-19 funding received during 2020.

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Business services

  • M&A activity in the business services sector is strong, and deal multiples remain high for assets that are focused on tech-enabled delivery models. The pandemic accelerated the transition from traditional to tech-enabled services, and demand has continued to increase for capabilities that can digitalise workflows and deliver higher-quality services more efficiently.
  • Investor interest remains high in areas such as inspection, certification and testing, in which demand has grown due to deferred maintenance from the pandemic, increased regulations, and growing complexity as a function of advances in engineering or technology. We have seen growth in inspection and lifetime extension certification services for some oil- and gas-related infrastructure in Europe due to the Russia–Ukraine conflict.
  • Demand remains high for outsourced services, as labour shortages continue and business leaders seek to acquire key capabilities and divest or outsource parts of their business. We are seeing more creative models of service delivery with the purpose of focusing more on value rather than growth as a strategy. These include the expansion of the hybrid staffing model and the development of a fully outsourced managed-services model. However, the skilled labour shortages that created the opportunities for growth may also be a limiting factor for these companies to scale their offerings effectively in the short term.
  • Private equity remains interested in the education technology (edtech) or remote training sub-sector, in which companies are increasingly looking for expertise and capabilities delivered in a remote environment. Companies are starting to expand services beyond corporate training to areas such as workforce safety and environmental health and safety (EHS) compliance. ESG is a hot strategic topic, and this type of offering is attractive because it helps companies reach their ESG goals in the medium term.
  • In traditional business services, such as route-based services, we expect to see further consolidation, especially in highly fragmented markets such as cleaning and sanitisation, pest control, installation and repair services. We expect that most M&A activity will be regional and may result in the creation of a few dominant regional players, especially in Europe.

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Engineering and construction

  • The engineering and construction (E&C) industry continues to face global supply chain disruptions, rising commodity prices and skilled labour shortages, all of which are contributing to project delays and increasing pressure on already tight margins. The sector’s low margins don’t make it particularly attractive to PE buyers, and we saw a softening of M&A volumes in the first half of 2022, mainly due to fewer PE deals.
  • Public investments and infrastructure funding, such as the US Infrastructure Investment and Jobs Act and the EU’s NextGenerationEU recovery plan, will bring additional funding for roads, bridges and other construction projects. Although the funding will be spent over time, we expect this will nonetheless provide a boost to M&A activity in the short term.
  • As fewer and fewer companies provide both engineering and construction services, preferring instead to focus on the one area in which they have strategic capabilities, we expect those that still offer both to review their portfolios and divest non-core assets to free up capital and management’s time to focus on their core business.
  • Looking forward to the remainder of the year, we expect smaller strategic deals will take place among corporates looking for regional consolidation opportunities and cost synergies. For some, this involves bolt-on acquisitions of innovative technologies, especially in the green energy space, or the acquisition of specific technical capabilities, such as engineers and new-technology experts.

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Industrial manufacturing

  • As large consumers of energy and commodities, many manufacturers have been particularly impacted by higher energy prices and the volatility of commodities markets, and have been experiencing significant increases in other cost inputs such as labour.
  • Inflation is making it difficult for dealmakers to accurately forecast costs and margins, which will likely result in a more conservative view of value. In this context, many players are working on pricing strategies and joint ventures and alliances to defend their share of the industry profit pool.
  • Supply chain disruption also remains an issue for many companies, and we expect it will lead to targeted M&A as business leaders seek to build greater supply chain resilience. We also are seeing some companies looking to invest in different parts of the value chain to better react to the volatility of the markets and defend their margins. This could be either backwards vertical integration to secure control over key inputs or downwards vertical integration to gain more control over the distribution channel. A tightening regulatory environment in the US, UK, EU and several other countries may also lead to dealmakers undertaking smaller deals to avoid the regulatory scrutiny that larger deals often bring.
  • Technology remains a priority focus area for the industrial manufacturing sector, with M&A being used to acquire innovative and technological capabilities, such as autonomous software and other new digital technologies to help to improve industrial processes, business results and safety. We see a clear path towards new investments in automation and AI applied to industrial processes, with a strong convergence between technology and industrial manufacturing in specific niches such as agricultural machinery.
  • We expect to see value preservation strategies employed by large corporations to maintain the level of their cash flows. Where inflation may create negative real returns on investment in the short to medium term, this could trigger further strategic portfolio review and divestment of non-core assets.
  • ESG concerns continue to gain attention among business leaders, with companies looking to invest in green solutions, such as green chemicals, green cement and sustainable building products, and dealmakers building ESG criteria into their investment strategies. 

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Mid-year M&A outlook for industrial manufacturing and automotive

There’s no doubt that recent global macroeconomic and geopolitical events have cast a shadow over the growth prospects and profitability of many IM&A sectors. However, business leaders are focused on value creation, capital remains available for M&A, and we are optimistic that demand for technology-enabled and data-driven assets will ensure a healthy level of deal-making for the remainder of 2022.

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